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Notes for India as the digital trade juggernaut rolls on
https://cis-india.org/internet-governance/blog/the-hindu-arindrajit-basu-february-8-2022-notes-for-india-as-the-digital-trade-juggernaut-rolls-on
<b>Sitting out trade negotiations could result in the country losing out on opportunities to shape the rules.</b>
<p>The article by Arindrajit Basu was <a class="external-link" href="https://www.thehindu.com/opinion/op-ed/notes-for-india-as-the-digital-trade-juggernaut-rolls-on/article38393921.ece">published in the Hindu</a> on February 8, 2022</p>
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<p style="text-align: justify; ">Despite the cancellation of the Twelfth Ministerial Conference (MC12) of the World Trade Organization (WTO) late last year (scheduled date, November 30, 2021-December 3, 2021) due to COVID-19, digital trade negotiations continue their ambitious march forward. On December 14, Australia, Japan, and Singapore, co-convenors of the plurilateral Joint Statement Initiative (JSI) on e-commerce, welcomed the ‘substantial progress’ made at the talks over the past three years and stated that they expected a convergence on more issues by the end of 2022.</p>
<h3>Holding out</h3>
<p style="text-align: justify; ">But therein lies the rub: even though JSI members account for over 90% of global trade, and the initiative welcomes newer entrants, over half of WTO members (largely from the developing world) continue to opt out of these negotiations. They fear being arm-twisted into accepting global rules that could etiolate domestic policymaking and economic growth. India and South Africa have led the resistance and been the JSI’s most vocal critics. India has thus far resisted pressures from the developed world to jump onto the JSI bandwagon, largely through coherent legal argumentation against the JSI and a long-term developmental vision. Yet, given the increasingly fragmented global trading landscape and the rising importance of the global digital economy, can India tailor its engagement with the WTO to better accommodate its economic and geopolitical interests?</p>
<h3><strong>Global rules on digital trade</strong></h3>
<p style="text-align: justify; ">The WTO emerged in a largely analogue world in 1994. It was only at the Second Ministerial Conference (1998) that members agreed on core rules for e-commerce regulation. A temporary moratorium was imposed on customs duties relating to the electronic transmission of goods and services. This moratorium has been renewed continuously, to consistent opposition from India and South Africa. They argue that the moratorium imposes significant costs on developing countries as they are unable to benefit from the revenue customs duties would bring.</p>
<p style="text-align: justify; ">The members also agreed to set up a work programme on e-commerce across four issue areas at the General Council: goods, services, intellectual property, and development. Frustrated by a lack of progress in the two decades that followed, 70 members brokered the JSI in December 2017 to initiate exploratory work on the trade-related aspects of e-commerce. Several countries, including developing countries, signed up in 2019 despite holding contrary views to most JSI members on key issues. Surprise entrants, China and Indonesia, argued that they sought to shape the rules from within the initiative rather than sitting on the sidelines.</p>
<p style="text-align: justify; ">India and South Africa have rightly pointed out that the JSI contravenes the WTO’s consensus-based framework, where every member has a voice and vote regardless of economic standing. Unlike the General Council Work Programme, which India and South Africa have attempted to revitalise in the past year, the JSI does not include all WTO members. For the process to be legally valid, the initiative must either build consensus or negotiate a plurilateral agreement outside the aegis of the WTO.</p>
<p style="text-align: justify; ">India and South Africa’s positioning strikes a chord at the heart of the global trading regime: how to balance the sovereign right of states to shape domestic policy with international obligations that would enable them to reap the benefits of a global trading system.</p>
<h3><strong>A contested regime</strong></h3>
<p style="text-align: justify; ">There are several issues upon which the developed and developing worlds disagree. One such issue concerns international rules relating to the free flow of data across borders. Several countries, both within and outside the JSI, have imposed data localisation mandates that compel corporations to store and process data within territorial borders. This is a key policy priority for India. Several payment card companies, including Mastercard and American Express, were prohibited from issuing new cards for failure to comply with a 2018 financial data localisation directive from the Reserve Bank of India. The Joint Parliamentary Committee (JPC) on data protection has recommended stringent localisation measures for sensitive personal data and critical personal data in India’s data protection legislation. However, for nations and industries in the developed world looking to access new digital markets, these restrictions impose unnecessary compliance costs, thus arguably hampering innovation and supposedly amounting to unfair protectionism.</p>
<p style="text-align: justify; ">There is a similar disagreement regarding domestic laws that mandate the disclosure of source codes. Developed countries believe that this hampers innovation, whereas developing countries believe it is essential for algorithmic transparency and fairness — which was another key recommendation of the JPC report in December 2021.</p>
<h3><strong>India’s choices</strong></h3>
<p style="text-align: justify; ">India’s global position is reinforced through narrative building by political and industrial leaders alike. Data sovereignty is championed as a means of resisting ‘data colonialism’, the exploitative economic practices and intensive lobbying of Silicon Valley companies. Policymaking for India’s digital economy is at a critical juncture. Surveillance reform, personal data protection, algorithmic governance, and non-personal data regulation must be galvanised through evidenced insights,and work for individuals, communities, and aspiring local businesses — not just established larger players.</p>
<p style="text-align: justify; ">Hastily signing trading obligations could reduce the space available to frame appropriate policy. But sitting out trade negotiations will mean that the digital trade juggernaut will continue unchecked, through mega-regional trading agreements such as the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). India could risk becoming an unwitting standard-taker in an already fragmented trading regime and lose out on opportunities to shape these rules instead.</p>
<p style="text-align: justify; ">Alternatives exist; negotiations need not mean compromise. For example, exceptions to digital trade rules, such as ‘legitimate public policy objective’ or ‘essential security interests’, could be negotiated to preserve policymaking where needed while still acquiescing to the larger agreement. Further, any outcome need not be an all-or-nothing arrangement. Taking a cue from the Digital Economy Partnership Agreement (DEPA) between Singapore, Chile, and New Zealand, India can push for a framework where countries can pick and choose modules with which they wish to comply. These combinations can be amassed incrementally as emerging economies such as India work through domestic regulations.</p>
<p style="text-align: justify; ">Despite its failings, the WTO plays a critical role in global governance and is vital to India’s strategic interests. Negotiating without surrendering domestic policy-making holds the key to India’s digital future.</p>
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<p style="text-align: justify; "><i>Arindrajit Basu is Research Lead at the Centre for Internet and Society, India. The views expressed are personal. The author would like to thank The Clean Copy for edits on a draft of this article.</i></p>
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For more details visit <a href='https://cis-india.org/internet-governance/blog/the-hindu-arindrajit-basu-february-8-2022-notes-for-india-as-the-digital-trade-juggernaut-rolls-on'>https://cis-india.org/internet-governance/blog/the-hindu-arindrajit-basu-february-8-2022-notes-for-india-as-the-digital-trade-juggernaut-rolls-on</a>
</p>
No publisherbasuDigitalisationDigital KnowledgeInternet GovernanceE-CommerceDigital India2022-02-09T15:04:36ZBlog EntryComments on proposed amendments to the Consumer Protection (E-Commerce) Rules, 2020
https://cis-india.org/internet-governance/blog/comments-on-proposed-amendments-to-the-consumer-protection-e-commerce-rules-2020
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<p style="text-align: justify;" dir="ltr"> </p>
<p style="text-align: justify;" dir="ltr">The Consumer Protection (E-commerce) Rules, 2020 were first introduced in an attempt to ensure that consumers were granted adequate protections and to prevent the adoption of unfair trade practices by E-commerce entities. The amendments have proposed several rules which will protect the consumer with a restriction on misleading advertisements and appointment of grievance officers based in India. However, while on this path, the proposed rules have created hurdles in the operations of e-commerce, reducing the ease of business and increasing the costs of operations especially for smaller players; which could eventually pass on to the consumers.</p>
<p style="text-align: justify;" dir="ltr">In our submission to the Ministry of Consumer Affairs, we focussed our analysis on eight points: Definitions and Registration, Compliance, Data Protection and Surveillance, Flash Sales, Unfair Trade Practices, Jurisdictional Issues with Competition Law, Compliance with International Trade Law and Liabilities of Marketplace E-commerce Entities. </p>
<p style="text-align: justify;" dir="ltr">A snapshot of our recommendations and analysis is listed out below. To read our full submission, please click <a href="https://cis-india.org/internet-governance/centre-for-internet-society-ecommerce-amendments">here</a>.</p>
<h3 style="text-align: justify;">Definitions and Registrations</h3>
<p style="text-align: justify;" dir="ltr">The registration of entities with the DPIIT must be made as smooth as possible especially considering the wide definition of E-commerce entities in the rules, which may include smaller businesses as well. In particular, we suggested doing away with physical office visits. </p>
<h3 style="text-align: justify;">Compliance</h3>
<p style="text-align: justify;" dir="ltr">As a general observation, compliance obligations should be differentiated based on the size of the entity and the volume of transactions rather than adopting a ‘one size fits all’ approach which may harm smaller businesses, especially those that are just starting up. Before these rules come into force, further consultations with small and medium-sized business enterprises would be vital in ensuring that the regulation is in line with their needs and does not hamper their growth. Excessive compliance requirements may end up playing into the hands of the largest players as they would have larger financial coffers and institutional mechanisms to comply with these obligations.</p>
<p style="text-align: justify;" dir="ltr">There is some confusion in the law as to whether the Chief Compliance officer mentioned in the amended rules is the same as the “nodal person of contact or an alternate senior designated functionary who is resident of India” under Rule 5(1).</p>
<p style="text-align: justify;" dir="ltr">The safe harbour should therefore refer to due diligence by the CCO and not the e-commerce entity itself. The requirement for the compliance officer to be an Indian citizen who is a resident and a senior officer or managerial employee may place an undue burden on small E-commerce players not located in India. </p>
<h3><span style="text-align: justify;">Data Protection and Surveillance</span></h3>
<p style="text-align: justify;" dir="ltr">In the absence of a Personal Data protection bill these rules do not adequately protect consumers’ personal data and reduce the powers given to the Central Government to access data or conduct surveillance</p>
<h3 style="text-align: justify;">Flash Sales </h3>
<p style="text-align: justify;" dir="ltr">Conventional flash sales should be defined. Clear distinction must be made between conventional flash sales and fraudulent flash sales. The definition should not be limited to interception of business “using technological means”, which limits the scope of the fraudulent flash sales. Further parameters must be provided for when a flash sale will be considered a fraudulent flash sale. </p>
<h3 style="text-align: justify;">Unfair Trade Practices </h3>
<p style="text-align: justify;" dir="ltr">The rules place restrictions on marketplace E-commerce entities from selling their own goods or services or from listing related enterprises as sellers on their platforms. No such restriction applies to brick and mortar stores, and this blanket ban must be rethought. </p>
<h3 style="text-align: justify;"> Jurisdictional Issues with Competition Law </h3>
<p style="text-align: justify;" dir="ltr">This rule brings the issue of ‘abuse of dominant power’ under the fora of the Consumer Protection Authority or the Consumer Disputes Redressal Commissions. Overlapping jurisdiction of this nature could introduce regulatory delays into the dispute resolution process and can be a source of tension for the parties and regulatory authorities. The intention behind importing a competition law concept such as “abuse of dominant position” in the consumer protection regulations may be understandable, such a step might be effective in jurisdictions which have a common regulatory authority for both competition law as well as consumer protection issues, such as Australia, Finland, Ireland, Netherlands. However, in a country such as India which has completely separate regulatory mechanisms for competition and consumer law issues, such a provision may lead to logistical difficulties.</p>
<h3 style="text-align: justify;">Compliance with International Trade Law </h3>
<p style="text-align: justify;" dir="ltr">A robust framework on ranking with transparent disclosure of parameters for the same would also go a long way towards addressing concerns with discrimination and national treatment under WTO law. Further, the obligation to provide domestic alternatives should be clarified and amended to ensure that it does not cause uncertainty and open India up to a national treatment challenge at the WTO.</p>
<h3 style="text-align: justify;">Liabilities of Marketplace E-commerce Entities</h3>
<p style="text-align: justify;" dir="ltr">Fallback liability is an essential component of consumers’ protection in the E-commerce space. However, as currently envisioned there is a lack of clarity surrounding the extent to which fallback liability is applicable on E-commerce entities as well as exemptions to this liability. We have recommended alternate approaches adopted in other jurisdictions, which include</p>
<ol><li style="list-style-type: lower-alpha;" dir="ltr">
<p style="text-align: justify;" dir="ltr">Liability through negligence</p>
</li><li style="list-style-type: lower-alpha;" dir="ltr">
<p style="text-align: justify;" dir="ltr">Liability as an exemption to safe harbour</p>
</li></ol>
<div style="text-align: justify;"> </div>
<p>
For more details visit <a href='https://cis-india.org/internet-governance/blog/comments-on-proposed-amendments-to-the-consumer-protection-e-commerce-rules-2020'>https://cis-india.org/internet-governance/blog/comments-on-proposed-amendments-to-the-consumer-protection-e-commerce-rules-2020</a>
</p>
No publisherVipul Kharbanda, Rajat Misra, Arindrajit Basu and Aman NairE-CommerceConsumer Rights2021-07-27T14:45:07ZBlog EntryCIS Response to Call for Stakeholder Comments: Draft E-Commerce Policy
https://cis-india.org/internet-governance/blog/cis-response-to-call-for-stakeholder-comments-draft-e-commerce-policy
<b>CIS is grateful for the opportunity to submit to the Department of Industrial Policy and Promotion comments to the draft National e-commerce policy.</b>
<p>The Department of Industrial Policy and Promotion released a draft e-commerce policy in February for which stakeholder comments were sought. CIS responded to the request for comments.</p>
<p> The full text can be accessed <a href="https://cis-india.org/internet-governance/resources/e-commerce_submission_by_cis.pdf-2">here</a>.</p>
<p>
For more details visit <a href='https://cis-india.org/internet-governance/blog/cis-response-to-call-for-stakeholder-comments-draft-e-commerce-policy'>https://cis-india.org/internet-governance/blog/cis-response-to-call-for-stakeholder-comments-draft-e-commerce-policy</a>
</p>
No publisherArindrajit Basu, Vipul Kharbanda, Elonnai Hickok and Amber SinhaE-CommerceInternet Governance2019-04-10T12:12:43ZBlog EntryCIS Response to Draft E-Commerce Policy
https://cis-india.org/internet-governance/blog/cis-response-to-draft-e-commerce-policy
<b>CIS is grateful for the opportunity to submit comments to the Department of Industrial Policy and Promotion on the draft national e-commerce policy. This response was authored by Amber Sinha, Arindrajit Basu, Elonnai Hickok and Vipul Kharbanda.</b>
<p> </p>
<h4>Access our response to the draft policy here: <a href="https://cis-india.org/internet-governance/resources/e-commerce-submission">Download</a> (PDF)</h4>
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<h3>The E-Commerce Policy is a much needed and timely document that seeks to enable the growth of India's digital ecosystem. Crucially, it backs up India's stance at the WTO, which has been a robust pushback against digital trade policies that would benefit the developed world at the cost of emerging economies. However, in order to ensure that the benefits of the digital economy are truly shared, focus must not only be on the sellers but also on the consumers, which automatically brings in individual rights into the question. No right is absolute but there needs to be a fair trade-off between the mercantilist aspirations of a burgeoning digital economy and the civil and political rights of the individuals who are spurring the economy on. We also appreciate the recognition that the regulation of e-commerce must be an inter-disciplinary effort and the assertion of the roles of various other departments and ministries. However, we also caution against over-reach and encroaching into policy domains that fall within the mandate of existing laws.</h3>
<p> </p>
<p>
For more details visit <a href='https://cis-india.org/internet-governance/blog/cis-response-to-draft-e-commerce-policy'>https://cis-india.org/internet-governance/blog/cis-response-to-draft-e-commerce-policy</a>
</p>
No publisheramberE-CommerceFeaturedHomepageInternet Governance2019-04-26T06:40:34ZBlog EntryPolicy Shaping in the Indian IT Industry: Recommendations by NASSCOM, 2006-2012
https://cis-india.org/raw/policy-shaping-in-the-indian-it-industry-recommendations-by-nasscom-2006-2012
<b>This is the first of a series of three blog posts, authored by Pavishka Mittal, tracking the engagements by NASSCOM and iSPIRT in suggesting and shaping the IT industry policies in India during 2006-2016. This posts focuses on the policy activities of NASSCOM in 2006-2012 with specific reference to Special Economic Zones, E-Commerce Industry and Transfer Pricing, along with a few other miscellaneous important recommendations.</b>
<p> </p>
<p><strong>1.</strong> <a href="#1">Introduction</a></p>
<p><strong>2.</strong> <a href="#2">Tax Reforms in Special Economic Zones (SEZs)</a></p>
<p><strong>3.</strong> <a href="#3">E-Commerce Industry</a></p>
<p><strong>4.</strong> <a href="#4">Transfer Pricing Issues</a></p>
<p><strong>5.</strong> <a href="#5">Other Recommendations</a></p>
<p><strong>5.1.</strong> <a href="#5-1">Concerns with the Union Budget Proposals</a></p>
<p><strong>5.2.</strong> <a href="#5-2">Request for Clarity in Classification of Transactions and Guidelines</a></p>
<p><strong>5.3.</strong> <a href="#5-3">New Retrograde Obligations under Law</a></p>
<p><strong>6.</strong> <a href="#6">Endnotes</a></p>
<p><strong>7.</strong> <a href="#7">Author Profile</a></p>
<hr />
<h2 id="1">1. Introduction</h2>
<p>The National Association of Software and Services Companies (NASSCOM) was established in 1988 as a non-profit, global trade association registered under the Indian Societies Act 1860 representing the interests of the IT Industry, now with over 1500 members. Its objective is to facilitate trade in the software development and services, software products, IT enabled/BPO services and e-commerce. It also undertakes research projects for facilitating innovation in advanced software and maintains data on industry trends, even a national database of registered and verified knowledge workers in the industry. Nevertheless, its role of policy advocacy cannot be over emphasized. It regularly interacts with the Government of India to bring about a favourable business environment for the IT Industry.</p>
<p>This blog post, the first part in a series, discusses NASSCOM’s major issues with policies of the Government of India in the period 2006-2012. The concerns of the IT industry, as highlighted by NASSCOM in the period aforementioned are with reference to the Special Economic Zones, E-Commerce Industry and Transfer Pricing broadly along with other miscellaneous important recommendations. The subsequent blog posts will focus on specific tax issues post 2012 and will elaborately discuss transfer pricing related concerns.</p>
<h2 id="2">2. Tax Reforms in Special Economic Zones (SEZs)</h2>
<p>The ITes and BPO industry constitutes a sizable portion of the number of SEZs in the country <strong>[1]</strong> so much so that it has been argued that the IT industry alone reaps the benefits of the SEZs and STPIs to the exclusion of the other sectors <strong>[2]</strong>.</p>
<p>The most salient incentive in the SEZ Act enacted by the Government of India in 2005 had been income tax exemption of export profits which contributed to the scheme’s success in attracting major investments <strong>[3]</strong>. Further, exemption from minimum alternate tax had been provided under section 115JB of the Income Tax Act. However, in 2011, the government decided to impose a Minimum Alternate Tax upto the rate of 18.5% on the book profits of SEZ’s developers and units through the Finance Act 2012 by introducing amendments to the Income Tax Act 1961, to be effective from April 2012 <strong>[4]</strong>. NASSCOM took a strong stance against equality in corporate tax liability as such tax is sought to be imposed upon income derived from investments made with a commitment of tax exemption. The intention of the government in making such policies having regressive outcomes will be judged if key promised characteristics of SEZs were differential economic laws from the remaining domestic territory. For all practical purposes, they are deemed to be foreign territories for the levy of trade duties and tariffs <strong>[5]</strong>. In the case of Mindtree Limited v. Union of India <strong>[6]</strong>, software company Mindtree argued that the imposition of MAT in SEZs was against the concept of promissory estoppel and the doctrine of legitimate expectation, which rendered such taxes constitutionally invalid <strong>[7]</strong>. Even though a time limit was not prescribed for the above tax exemption, it was argued that SEZ policy was predicated on tax relief and the subsequent change in policy was arbitrary and unfair. Individual taxpayers and undertakings should not be affected by subsequent laws if they make sizable investments, modify business models and bear the added expenses of moving into or developing a SEZ. It cannot be disputed that this argument is untenable keeping in mind that the legislature cannot be bound by past promises in line with practical considerations and their independence with regard to the effective discharge of public functions. It was held that the legislature cannot be bound by the doctrine of promissory estoppel <strong>[8]</strong>.</p>
<p>The Adani group had also challenged the imposition of MAT in the Gujarat HC in 2011 on the ground that that any amendments to the SEZ Act can only be brought about by amendments to the SEZ Act itself, and not through the Finance Act <strong>[9]</strong>. The SC in Madurai District Central Cooperative Bank Ltd. <strong>[10]</strong> held that the parliament has the authority to introduce a new charge of tax even by incorporating it in any other statute other than the act. However, the fact remains that such policies lead to a volatile business environment and the importance of stable business policies cannot be overemphasized. In 2011, NASSCOM recommended that MAT be withdrawn as it is opposed to the government’s long term policy of SEZ’s growth <strong>[11]</strong>. Alternatively, it stated that the imposition of MAT be withdrawn to ensure the continued economic viability of the SEZs which have already been notified by the government <strong>[12]</strong>. It also stated that international norms should be applied for the determination of the MAT rate, which was 1/3rd of the corporate tax rates <strong>[13]</strong>.</p>
<p>Another concern highlighted by other stakeholders was the prescribed period of ten years for the setting of the MAT against regular tax liability. This MAT credit may expire or be on the verge of expiration for participants in SEZs who enjoy tax holiday for a prescribed number of years when they start operations due to absence of initial tax liability. Foreign investors will face difficulties in claiming tax benefits in their home jurisdictions for MAT paid in India. Further, the exemption granted to SEZ developers as to the levy of Dividend Distribution Tax @ 15% has been revoked by the Finance Ministry in 2011 severely affecting the IT industry.</p>
<p>The government finally took note of the increased disinvestment as a consequence of such taxes and proposed to make the imposition of MAT and Dividend Distribution Tax inapplicable to SEZ’s in 2015 <strong>[14]</strong>.</p>
<h2 id="3">3. E-Commerce Industry</h2>
<p>NASSCOM in 2012 suggested the lowering of the interchange tax rate on debit cards transactions by the RBI. Debit cards possess lower risk in comparison to credit cards, the transactions being concluded immediately and the same should be reflected in the form of differential taxes. A standard 1-2% interchange/transaction fees were generally levied by banks. NASSCOM also recommended the introduction of a 2% tax incentive on the purchase of products online to facilitate increased purchases and encourage consumers to even undertake small value transactions online. Further, it emphasized that the base of e-commerce users have to be expanded. It commented on the differences in the Internet usage costs between China and India, USD 10 and USD 15-20 respectively. High internet usage costs can only be indicative of reduced Internet access. However, this is not to state that the E-commerce industry is unsuited for India due to infrastructural inefficiencies. NASSCOM has stated that India as of 2012 possesses over 100 million Internet users. Technology has to be developed which would reduce dropout rates of transactions. Further it suggested the creation of an online receipt repository which would store all online transaction receipts, accessible through mobile phones or the internet. It would contribute in increasing customer confidence by enabling tracking of payment, delivery etc.</p>
<p>The RBI in response to the recommendations of NASSCOM and the Online Payment Advisory Group <strong>[15]</strong> and in consultation with all concerned stakeholders, decided to put a maximum limit on the Merchant Discount Rate (MDR) for transactions undertaken with a debit card [16].</p>
<h2 id="4">4. Transfer Pricing Issues</h2>
<p>Transfer Pricing has become the dominant international tax issue affecting multinational corporations operating in India [17]. As noted by NASSCOM, a steep rise in litigation and the number of transfer pricing adjustments with the Indian Revenue Authority (IRA) has been observed due to ‘increased scrutiny’ by the IRA who has been rejecting the profit declared by foreign companies accruing to Indian subsidiaries by applying very high markups in this sector. Increased complications in setting valid prices through this process have arisen due to the rising presence of ‘highly complex transactions’ involving intangibles and multi-tiered services across the world. The Finance Act 2012 extended the applicability of domestic party transactions to certain related domestic parties, if the aggregate value of such transactions exceeds INR 5 crore, to any expenditure with respect to which deduction is claimed while calculating profits and to transactions related to businesses eligible for profit-linked tax incentives, including SEZ units under section 10AA <strong>[18]</strong>.</p>
<p>NASSCOM has proposed a three pronged approach to the problem of backlog of cases and absence of certainty of price of transactions:</p>
<ol><li>Implementation of Safe Harbour provisions to resolve existing disputes.</li>
<li>Introduction of Advance Pricing Agreements <strong>[19]</strong> to set fair and transparent prices.</li>
<li>Initiation of review of the structure and procedure of the Dispute Resolution Panel <strong>[20]</strong>.<br /></li></ol>
<p>The Finance Act 2009 introduced section 92CB <strong>[21]</strong> in the Income Tax Act 1961 which provided for the subjection of the arms length price determined under section 92C or section 92CA to Safe Harbour Rules, to be declared by the Central Board of Direct Taxes (CBDT). For the valid determination of such a transfer price, the minimum transfer price that a taxpayer is expected to earn for international transactions is prescribed along with certain specific norms for particular transactions. The safe harbour transfer price for eligible transactions is subject to certain prescribed minimum ceilings <strong>[22]</strong>. A price determined in accordance with such guidelines would be deemed to be an Arms Length Price (ALP). To that extent the safe Harbour Rules are in the nature of ‘presumptive taxation’ and incentivises IT firms to avoid unnecessary litigation by opting for the same. Unilateral, bilateral and multilateral Advance Pricing Agreements, binding on the taxpayer and the revenue authorities for five consecutive years have been introduced with effect from 1 July 2012. Certain domestic transactions are inapplicable for APA’s in the absence of other monetary conditions/stipulations under law for entering into an APA. Documentation on comparables is required to be maintained to substantiate compliance with arms length principle.</p>
<p>The concerns of the prescribed rates include non-representation of industry benchmarks and economic realities in as much as the prescribed rates exceed the actual arms length prices, often leading to the risk of double taxation in foreign jurisdictions. The division of IT services into two components has also been criticized as many of the activities might overlap. NASSCOM has stated that it is not clear how the existing current issues are proposed to be resolved. The introduction of domestic parties as applicable parties to be subject to the transfer pricing regulations will only increase the complexity in the law. There has been subsequent judicial development involving the establishment of some principles for the valid determination of comparables for the purpose of identifying an acceptable transfer price which will be discussed in the next blog post.</p>
<h2 id="5">5. Other Recommendations</h2>
<h3 id="5-1">5.1. Concerns with the Union Budget Proposals</h3>
<p>NASSCOM summarized that the Union Budget Proposals 2012-13 focus on the reduction of the fiscal deficit through higher taxation rather than expenditure management. More specifically, it focuses on the following concerns of the IT Industry:</p>
<ul><li>The issues of tax simplification have not been resolved as no roadmap for the implementation of the Direct Taxes Code and the Goods and Services Tax Bill has been provided.</li>
<li>The increase in the Current Account Deficit should have incentivized the government to introduce measures which facilitate high value exports, which has been wholly ignored from the budget.</li>
<li>Increase in indirect taxes, namely excise duty and service tax is a retrograde policy measure.</li>
<li>Restrictive conditions in the SEZ Act 2005 which do not facilitate the setting up of small companies, have to be modified.</li>
<li>There is no mention of reduction of Tax Deducted at Source (TDS) for SMEs and introduction of non-profit linked incentives in the form of employment benefits etc. in the proposal.</li>
<li>Similar provisions should also be introduced for Tier II and III cities in the country.</li>
<li>Some announcements as to the simplification of service tax refund and the removal of the provisions involving dual levy of service tax and VAT are not sufficient to resolve ambiguities in law. NASSCOM, in light of the increasing delays of service tax, suggested exemption of export activity from such tax and the applicability of a simplified mechanism similar to CENVAT wherein exemption will be provided to exporters in proportion of their exports to total sales.</li></ul>
<h3 id="5-2">5.2. Request for Clarity in Classification of Transactions and Guidelines</h3>
<p>NASSCOM in its pre-budget recommendations had suggested that in light of the confusion of the characterization of software as goods or services and the resultant dual taxation, in the form of taxes paid to both the Central and the State Governments, the provision of software, whether customized or packaged should be treated as a service irrespective of the media and mode of transfer with the assurance from the States that no VAT shall be leviable on software. Further, guidelines have to be outlined for various e-commerce transactions like database subscription, cloud computing, webhosting and data warehousing. Onsite exporter of services are being denied the benefits of certain tax exemptions due to the sunset of STPI provisions, thus forming the need for a formal clarification by the government deeming these activities to be an integral component of the IT services industry.</p>
<h3 id="5-3">5.3. New Retrograde Obligations under Law</h3>
<p>NASSCOM emphasized that the introduction of certain provisions, related to GAAR, related party transactions and the withholding of tax in the Finance Bill, some of these retrospective in nature, enhance the difficulties faced by the IT industry. Increased obligations on the corporate tax payers in the form of imposition of additional taxes will only increase the scope of multiple interpretations of the provisions which will lead to the exercise of discretionary powers by the tax authorities.</p>
<h2 id="6">6. Endnotes</h2>
<p><strong>[1]</strong> As of September 2011, a significant majority of the 143 operational SEZs in the country belonged to the IT/ITeS and electronic hardware as per data released by the Ministry of Commerce and Industry.</p>
<p><strong>[2]</strong> See: <a href="http://articles.economictimes.indiatimes.com/2012-02-25/news/31099874_1_sez-unit-sez-promoters-multi-product">http://articles.economictimes.indiatimes.com/2012-02-25/news/31099874_1_sez-unit-sez-promoters-multi-product</a>.</p>
<p><strong>[3]</strong> Section 10AA of the Income Tax Act provides for 100% income tax exemption on export income for SEZ units for the first five years, 50% for the next five years and 50% of the ploughed back export profit for the next five years.</p>
<p><strong>[4]</strong> See: <a href="http://www.business-standard.com/article/economy-policy/govt-imposes-18-5-mat-on-sez-developers-units-111022800153_1.html">http://www.business-standard.com/article/economy-policy/govt-imposes-18-5-mat-on-sez-developers-units-111022800153_1.html</a>.</p>
<p><strong>[5]</strong> See: <a href="http://articles.economictimes.indiatimes.com/2005-07-08/news/27506703_1_special-economic-zone-act-sez-act-sez-bill">http://articles.economictimes.indiatimes.com/2005-07-08/news/27506703_1_special-economic-zone-act-sez-act-sez-bill</a>.</p>
<p><strong>[6]</strong> (2013)260CTR(Kar)146.</p>
<p><strong>[7]</strong> The doctrines of promissory estoppel and legitimate expectation, arising from legal relationships and reasonable expectation, respectively, are flexible equitable reliefs not defined in any statute. Judicial decisions have held that a party would not be entitled to go back on a clear and unequivocal promise which was intended to create legal relations, knowing or intending that it would be acted upon by the other party to whom the promise was made and acted upon by the other party under the doctrine of promissory estoppel. Legitimate expectation of a certain treatment arises against representation by an administrative authority, whether express (through promises), or implied (through consistent past practice) despite absence of any right otherwise.</p>
<p><strong>[8]</strong> It was held that the action of the government is legal as every tax exemption provision should also incorporate a sunset clause. The deletion of the exemption under law would only reduce the erosion of the tax base.</p>
<p><strong>[9]</strong> See: <a href="http://articles.economictimes.indiatimes.com/2011-05-11/news/29532409_1_sez-act-minimum-alternative-tax-mat">http://articles.economictimes.indiatimes.com/2011-05-11/news/29532409_1_sez-act-minimum-alternative-tax-mat</a>.</p>
<p><strong>[10]</strong> Madurai District Central Cooperative Bank Ltd. v. ITO (1975) 101 ITR 24(SC), the form and method of introduction of a legislation is not of importance provided the requirement of competence by the legislature to pass the deemed law with respect to its subject matter is satisfied. An amendment of a taxing statute, by an unconventional method of incorporation through an act of a different pith and substance is not unconstitutional. The primary purpose of the Finance Acts is to prescribe tax rates for taxes specified in the Income Tax Act. However, the above fact does not restrain the freedom of the legislature to impose an altogether new tax through the Finance Act or any other deemed legislation besides the Income Tax Act.</p>
<p><strong>[11]</strong> See: <a href="http://www.nasscom.in/nasscom-prebudget-recommendations">http://www.nasscom.in/nasscom-prebudget-recommendations</a>.</p>
<p><strong>[12]</strong> Ibid.</p>
<p><strong>[13]</strong> Ibid.</p>
<p><strong>[14]</strong> See: <a href="http://articles.economictimes.indiatimes.com/2015-02-13/news/59119589_1_sez-developers-and-units-minimum-alternate-tax-special-economic-zones">http://articles.economictimes.indiatimes.com/2015-02-13/news/59119589_1_sez-developers-and-units-minimum-alternate-tax-special-economic-zones</a>.</p>
<p><strong>[15]</strong> Formed in 2012 to examine the challenges faced by the E-commerce Industry in India and to recommend changes needed to facilitate the creation of a vibrant online payment sector.</p>
<p><strong>[16]</strong> Not exceeding 1 percent for transaction amount for value above 2,000. The directive was issued under section 18 of the Payments and Settlement Systems Act, with effect from July 1, 2012.</p>
<p><strong>[17]</strong> See: <a>http://www.pwc.com/gx/en/international-transfer-pricing/assets/india.pdf</a>.</p>
<p><strong>[18]</strong> This amendment would extend to any other transaction as may be specified and would be applicable for FY 2012-13 and subsequent years.</p>
<p><strong>[19]</strong> An Advance Pricing Agreement, generally covering multiple years, entered into between a taxpayer and at least one tax authority lays down the method of transfer pricing to be applicable to the taxpayer’s inter-company transactions which eliminates the need for transfer pricing adjustments for enclosed transactions provided the terms of the agreement are complied with.</p>
<p><strong>[20]</strong> The Finance Act 2009 inserted section 144C in the Income Tax Act which provides for the constitution of an alternative dispute resolution mechanism for transfer pricing taxation matters, namely a DRP (Dispute Resolution Panel) consisting of three commissioners rank officers.</p>
<p><strong>[21]</strong> Section 92CB defines Safe Harbour to be ‘circumstances under which the income tax authorities shall accept the transfer pricing declared by the assessee.’ The procedure for adopting safe harbour, the transfer price to be adopted, the compliance procedure upon adoption of safe harbours and circumstances in which a safe harbour adopted may be held to be invalid is specified in the new rules in 10TA to 10AG issued by the CBDT on 18th September 2013.</p>
<p><strong>[22]</strong></p>
<ul><li>Provision of software development services and information technology enabled services with insignificant risks- upto rs 500 crore- 20% or more on total operating costs, above rs 500 crore- 22% or more on total operating costs.</li><li>Provision of knowledge processes outsourcing services with insignificant risks-25% or more on total operating costs.</li><li>Provision of specified contract R & D services wholly or partly relating to software development with insignificant risks- 30% or more on total operating costs.</li></ul>
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<h2 id="7">7. Author Profile</h2>
<p>Pavishka Mittal is a law student at West Bengal National University of Juridical Sciences, Kolkata and has completed her second year. She takes contemporary dance very seriously and hopes to contribute to the dance community in India. Other than dancing, she indulges in binge-watching in her spare time.</p>
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For more details visit <a href='https://cis-india.org/raw/policy-shaping-in-the-indian-it-industry-recommendations-by-nasscom-2006-2012'>https://cis-india.org/raw/policy-shaping-in-the-indian-it-industry-recommendations-by-nasscom-2006-2012</a>
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No publisherPavishka MittalSpecial Economic ZonesTransfer Pricing PolicyNASSCOMResearchE-CommerceNetwork EconomiesIndustrial PolicyResearchers at WorkInformation Technology2016-07-04T08:11:05ZBlog Entry